How to Find Distressed Properties as a Real Estate Investor
Succeeding in real estate is all about finding good deals. That’s true whether you take a fix-and-flip or a buy-and-hold approach.
So how do you find a good deal on a property?
One place to look is in distressed properties. These are houses that have fallen into disrepair for one reason or another or the owner is in financial distress.
Either way, the owners are typically highly motivated to sell. This means you have the opportunity to get the property at an under-market price.
So long as you’re willing to put in the work for some repairs, like fixing the roof or repairing the HVAC system, you could make a sizable profit by buying a distressed property.
Types of Distressed Properties
Distressed properties could be in poor condition from wear over time or have significant damage from neglect.
More often than not, distressed properties have a troubled financial past. They could be foreclosed and owned by the government or a mortgage lender or bank.
Let’s dive deeper into the types of distressed properties you can find:
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- Delinquent tax properties—These are properties that have a tax lien on them because their property taxes haven’t been paid. You’ll need to buy the tax lien from the county first to purchase the property.
- Underwater mortgage properties—These are properties whose mortgage principal is more than the current value of the home.
- Auction properties—As the name suggests, these are houses that are up for auction. Common causes include bankruptcy and divorce.
- Probate properties—These are properties owned by someone who is deceased. Either they didn’t leave a will to give it to someone or their will instructed that it be sold and the proceeds divided between heirs.
- Real estate owned (REO) property—This refers to property owned by banks. These are already foreclosed and must be bought as-is.
- Government-owned property—Similar to REOs, government-owned properties are those whose mortgages were backed by a government entity and then failed. These agencies include Freddie Mac and Fannie Mae, the US Department of Housing and Urban Development (HUD), the Federal Deposit Insurance Corporation (FDIC), and the Department of Veteran Affairs (VA).
How to Find Distressed Properties
Now that you know what types of distressed properties are out there, let’s go over some strategies you can use to find them:
- Search online
One of the easiest places to start looking for distressed properties is online. You can access the multiple listing service (MLS) for free with the help of a real estate agent. It often features distressed properties, and this is where 9 out of 10 property sales happen.
Outside the MLS, there are also plenty of online databases you can look at like Zillow and Redfin. Anyone can access these for free even without an agent.
Lastly, more and more properties are being listed on classified listing sites like Craigslist and Facebook Marketplace. You might be surprised at how much you can find here.
Wherever you look online, pay attention to the following in your search:
- Keyword research—Type in terms that are most likely to generate distressed properties in the search results. Think terms like “fixer-upper” or “cash only.”
- Property photos—Does the house look dilapidated in the listing photos? Then it could be a goon to explore further.
- Listing descriptions—When scanning listings, try to notice key phrases like “motivated seller” or “needs repair.” These often signal that the house for sale is a distressed property.
- Search in person
If you don’t have any luck online, you can always search in person. This is also called “driving for dollars,” meaning you drive around looking at properties to leave a note and make an offer on.
When driving for dollars, you want to look for any of the following signs of a distressed property:
- Overgrown grass and landscaping
- Boarded up windows
- Peeling paint
- Notices on the front door
- A foreclosure lock on the front door
- An overflowing mailbox
- Caution tape
Once you’ve found some distressed properties, use skip tracing methods to identify the owner and see if they’re interested in selling.
Or if you think someone may still check the mailbox, leave a postcard in it with your contact information.
- Search public records
If you’re willing to do a little more digging, public records are a great place to find distressed properties. They’ll have information on foreclosed properties and sometimes even some that are in preforeclosure. The HUD store page also has a directory of all foreclosed homes backed by an FHA loan.
Counties are required to publish information on property auctions. Many of these result from bankruptcy or divorce, so you could also make friends with lawyers who can introduce you to motivated sellers.
Or try searching for the local property tax assessors’ website with a google search. Most have public lists that show properties that are currently tax delinquent.
You can also look for probate houses in probate court records or the obituary section of the newspaper. Just note that probate houses can be a risky investment sometimes since you’re required to put down a 10% non-refundable deposit.
- Hire help
Lastly, you can always hire help to find more distressed properties.
For example, wholesalers specialize in finding distressed properties, putting them under contract, and then selling the contract to an interested buyer. In other words, they’ll do all the work of finding the property for you in exchange for a fee.
Another way to speed up the process is to buy leads from a listing broker platform like ListSource. They’ll help you generate a list of qualified leads to narrow down your prospects.
Final Thoughts
Buying distressed properties is a great way to make a high return in real estate. The biggest challenge is just finding them.
But if you follow the steps above and have a little patience, you can easily discover some amazing properties with hidden value. Just keep your eyes open and sooner or later you’ll find the distressed property you’ve been looking for.